The RealClearMarkets/TIPP Economic Optimism Index, a leading gauge of consumer sentiment, gained 11.8% in January to 44.7. Despite the rise, the index remains in negative territory. It has remained in the pessimistic zone for 29 consecutive months now.
RealClearMarkets (RCM) is the new sponsor of the TIPP Economic Optimism Index.
The RCM/TIPP Economic Optimism Index is the first monthly measure of consumer confidence. It accurately predicts monthly changes, as reflected in other well-known surveys by The Conference Board and the University of Michigan.
Consumer spending drives two-thirds of the economy. Optimistic consumers spend money on automobiles, home improvements, new homes, and other large-ticket items.
RCM/TIPP Economic Optimism Index
This flagship index has three equally weighted components. For the index and its components, a reading above 50.0 signals optimism, and a reading below 50.0 indicates pessimism.
The RCM/TIPP Economic Optimism Index has three key components. In January, all three components improved.
- The Six-Month Economic Outlook, which measures how consumers perceive the economy's prospects in the next six months, increased from 34.3 in December to 39.3 in January, marking a 14.6% increase. In October, this component had posted 28.7, its lowest reading since the index debuted in February 2001.
- The Personal Financial Outlook, a measure of how Americans feel about their finances in the next six months, gained 11.1% from its previous reading of 49.5 to 55.0 this month. By crossing the neutral reading of 50.0, this component has now returned to positive territory.
- Confidence in Federal Economic Policies, a proprietary RCM/TIPP measure of views on the effectiveness of government economic policies, rose from 36.1 in December to 39.8, reflecting a 10.2% improvement.
Party Dynamics
Democrats posted the highest confidence level in January, at 63.7, with a 7.6 points improvement.
Meanwhile, Republicans' confidence gained 3.9 points to 31.3 this month. It had stayed in the pessimistic zone for 38 consecutive months since December 2020, after the 2020 presidential election.
Independents’ confidence has been in pessimistic territory for 46 months since April 2020, the month after the onset of the pandemic. Independents gained 2.1 points and posted 37.8 on the index in January.
Investor Confidence
RCM/TIPP considers respondents to be "investors" if they currently have at least $10,000 invested in the stock market, either personally or jointly with a spouse, either directly or through a retirement plan. We classified 33% of respondents who met this criterion as investors and 62% as non-investors. We could not ascertain the status of 5% of respondents.
Boosted by stock market gains in December, optimism among investors gained 20% from 45.8 in December to 54.9 in January, while it rose by 5% among non-investors, from 37.5 in December to 39.3 in January.
The economic optimism gap between investors and non-investors is 15.6 in January, widening from 8.3 in December.
Momentum
Comparing a measure's short-term average to its long-term average is one way to detect its underlying momentum. For example, if the 3-month average is higher than the 6-month average, the indicator is bullish. The same holds if the 6-month average exceeds the 12-month average.
In January, all three components are higher than their three-month moving averages. Furthermore, the three-month moving averages for all the components and the Economic Optimism Index are higher than the six-month moving average. As a result, the data shows a positive momentum.
Demographic Analysis
The number of groups in the positive zone indicates the breadth of optimism in American society. This month, five of the 21 demographic groups we track—such as age, income, education, and race—are above 50.0, indicating optimism on the Economic Optimism Index. Starting with three groups in January 2023, we saw steady improvement, peaking at nine groups in April and then a decline to return to one group in August. Since August, it has moved in the range of one to six. 19 of the 21 groups posted increased confidence in January compared to eight in December.
Inflation
Inflation acts as a form of indirect tax on American households.
According to our survey, 84% are worried about inflation. One-half (50%) are very concerned, and another 34% are somewhat concerned.
Even though the CPI rate has declined from a 40-year high of 9.1% in June 2022 to 3.1% in November 2023, Americans continue to be hurt because real wages have not improved.
The Federal Reserve believes that long-run inflation of 2%, measured by the annual change in the price index for personal consumption expenditures, is most consistent with its maximum employment and price stability mandate.
We will cover inflation in greater depth after the upcoming release of the CPI this week.
Recession
Four in ten (43%) Americans believe we are in a recession, and another 24% are unsure. 33% believe we are not in a recession. Note that those who believe we are in a recession show a big drop in January, perhaps the impact of widespread media coverage suggesting that we may not have a recession.
In January, over one-half (58%) think the U.S. economy is not improving, while 30% believe it is improving.
Fiscal Profligacy
The national debt crossed $34 trillion last week. On average, the government has borrowed $250,000 for each American household and is paying upwards of $1 trillion annually in interest—more than it spends on the nation’s defense!
One downside of ballooning federal debt is that refinancing becomes challenging. Supply and demand in the bond market will drive interest rates. If there is a high supply of government bonds (due to high debt levels), interest rates may need to stay high to attract investors and ensure that the government can continue borrowing money.
Most Americans are concerned about the sustainability of this trajectory. The high interest rates are also hurting Americans and sapping their confidence.
Despite our positive report, the overall economic outlook and confidence are, at best, mixed. We anticipate a stagflationary economy in 2024. The risks on the downside outweigh those on the upside. Watch the real estate market, the stock market, and the job market, and see if Washington can pass spending bills.
Using an online survey, TIPP polled 1,401 adults nationwide from January 3 to January 5.
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